UBS economist Robin Clements pushes forecast for first OCR hike back to Dec, notes little demand for credit at current rates

The Reserve Bank will leave the Official Cash Rate on hold until December given volatility in global financial markets, although the hike will be contingent on the global situation stabilising and local data pointing to strong growth in the September quarter, UBS economist Robin Clements says.

Following the Reserve Bank's July OCR statement, Clements had joined other bank economists in moving forward his forecast for the first OCR hike to September 15. However following a week of volatility on global markets and fresh concerns about the global economy falling back into recession, several economists have pushed their forecasts back to December, with markets pricing in even later hikes.

Given the global and local situations stabilise and improve, Clements is picking that the first OCR hike in December would be followed by quarterly 25 bps hikes by the Reserve Bank at its Monetary Policy Statements next year and for the OCR to be 4% by the end of 2012.

Although the OCR was currently sitting at a record low, Clements said lending rates were not. Credit data indicated little demand for credit at current rates.

Back to December

The outlook for the global economy had clearly taken a turn for the worse over the last week which was sufficient to stay the RBNZ’s hand for now, the Christchurch-based Clements said in a weekly UBS report.

"By definition, if there is a case for a hike it derives from the projection that doing nothing would mean CPI inflation could threaten the upper end of the 1-3% target band over the policy horizon. As a base case, this is our view," Clements said.

"There are three key aspects: (1) the record low OCR is stimulatory; (2) the economy looks to be on a recovery path, supported by strong terms of trade, the Rugby World Cup and reconstruction of earthquake-damaged Christchurch; and, (3) current high headline inflation poses an inflation risk as growth reabsorbs spare capacity and labour/product markets tighten (construction in particular)," he said.

"However, as usual, it is not this clear cut and certainly not compelling enough to require the urgency of an aggressive 50bp move as early as next month. The RBNZ itself provided the condition for removing the ‘insurance’ cut in its 28 July review statement: ‘Provided current global financial risks recede…’."

"Obviously, risks haven’t receded but have escalated to the downside for trading partner growth. Moreover, the OCR may be at a record low but lending rates are not – the business base lending rate is above average (just), while 5-year fixed mortgage rates are just below average and 2-year fixed through floating rates are only some 100-200 bps below their respective post-1999 averages. Credit growth, or the lack of it, suggests there is little demand for credit at current rates," Clements said.

"The RBNZ has implied that its next move will be to reverse the ‘insurance’ cut made following the February Christchurch earthquake. However, we would argue that how the OCR got down to its current level (i.e. an ‘emergency’) has little to do with whether or not the OCR should go up, or whether any such hike should be 25bp or 50bp," he said.

"We have pushed the 50bp hike out to the December MPS, on the basis that the global situation should have stabilised by then and data-flow supporting a strong Q3 should be emerging, suggesting the recovery should be robust enough to withstand an aggressive 50bp move. However, it is not difficult to envisage a situation where a more cautious move is required."